1) The document discusses measuring manufacturing costs and their impact on organizations. It examines how companies assess costs in making process and technology choices for biologic drug manufacturing. 2) Companies need cost models to understand how choices influence manufacturing costs, required investments, and risk management. Cost of goods models are commonly used but have limitations. 3) To optimize decision making, companies need consistent cost modeling approaches that define boundaries, use standard data, and can be shared across organizations. This will help companies drive down costs early in development.

1. FOCUS ON... BUSiNeSS
Measuring Manufacturing Cost
and its impact on Organizations
by Andrew Sinclair and Miriam Monge
T
he first article in this periodic
series reviewed the impact of
cost pressures on the
biopharmaceutical industry, in
particular the challenges the industry
faces in relation to high capital costs,
complex processes, and long product
development cycles (1). Here we
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examine what companies are doing to
assess costs in decisions about process
and technology choices relating to
manufacturing of biologic drug
substances. We will look into what
companies are currently doing and
what they need to be doing to control
costs. Companies need to know from
a strategic perspective how technology
and process choices influence
manufacturing costs within a portfolio
of products; the type and timing of
investments required to ensure
sufficient manufacturing capacity; and
how an understanding of costs can a product moves from research into cost impact of different investment
optimize risk management. manufacturing, the scope for and operating decisions. Of the
Process development can be defined improving manufacturing cost various methodologies (net present
as the start of the product life cycle. effectiveness diminishes. Many value [NPV] and return on
At this stage a manufacturing people in the industry, however, are investment [ROI]), cost of goods
process is defined in terms of unit realizing that in addition to (CoG) is by far the methodology
operations (discrete manufacturing characterization and forced most commonly used. Although not
operations). There are significant degradation studies, cost the most rigorous, it does have the
pressures to be fast (not on the optimization should be factored if merit that most people in the
critical path of a clinical program) we are to maximize the opportunity industry understand this approach.
and reduce the cost of development. to develop cost-effective robust CoG should not be used when you
Cost pressures are related to clinical processes. The later stages of the need to understand the interplay
risk insofar as a product entering product lifecycle are more about between expenditures, timing, and
clinical trials is highly unlikely to efficient operation of facilities project risk. NPV or ROI
reach approved status (high attrition (Table 1). methodologies are better techniques
rate). Consequently, there is no for analyzing alternative technologies
incentive to put a lot of effort into How Is Cost of Goods Measured? and manufacturing strategies because
developing an efficient process early Most cost models draw on the they can account for the impact of
on. With respect to product principles of financial and delays in expenditures and properly
lifecycle, the clear message is that as management accounting to assess the account for the time value of money.
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2. Figure 1: structure of a cost-of-goods (coG) model
For manufacturing, the most
significant line item on an income Process De nition
Process De nition
User Interface
User Interface Utilities
Utilities
statement is the cost of producing USP, Recovery, DSP
USP, Recovery, DSP
goods for sale (i.e., cost of goods sold or
cost of sales), which is shown directly
below net sales revenue. Subtracting
that cost from the sales revenue results Equipment
Equipment
Production
Production Labour
Labor Consumables
Consumables Materials
Materials
in a company’s gross profit, which is List
List
an important measure of operating
performance. By separating the direct
costs involved in producing goods for
sale from other expenses (e.g., selling, Site
Site COG
COG Capital
Capital
general, and administrative [SG&A] Reference
Reference
expenses; research and development
[R&D] expenses; interest and taxes), a
Figure 1: coG model applications
company can evaluate manufacturing
performance as a distinct measure that Stage Objectives Relative Impact
contributes to overall business Process development early phase Expression system choices ++++
performance. Rapid development
Direct development effort
A robust, well-structured cost
Process development late phase Cost-effective robust process +++
model enables managers to have a (for manufacturing) Optimum process
better insight into key cost drivers of Best manufacturing technology
a biomanufacturing process as well as Manufacturing strategy
the sensitivity of overall CoG to Facility operation Best operational performance +
changes in key parameters. These Manage change
models enable the cost impact of
implementing various technologies to Table 2: typical cost categories
be evaluated (as well as the effect of Category Description
process changes such as increasing A. Capital charge Estimate from the level of capital investment
product titers and yields) and can be B. Materials
validated with financial accounting 1. Process media Cell culture media
2. Process buffers Process solutions
data. Some management accounting
3. Cleaning materials Caustic (i.e. NaOH) and acids (i.e. H3PO4) for cleaning
techniques such as life-cycle cost
C. Consumables
analysis and activity-based costing 1. Column resins Protein A, ion-exchange matrices
are also incorporated into 2. Disposable bags Single-use plastic bags
manufacturing cost models in 3. Filters Depth, ultrafiltration, viral and sterile filters
recognition of the significant effect D. Labor
manufacturing efficiency has on the 1. Process Direct production labor costs
2. Quality % of D1
average CoG. In particular, the
3. Others (e.g. logistics) % of D1
number of successful production runs
E. Others
per year and the cost of facility 1. Insurance % of TCI
downtime and batch failure often 2. Engineering and spares % of D1
have a much greater effect on overall 3. Utilities % of TCI
manufacturing costs than changes in Total A + B + C + D + E
raw material or labor costs.
To illustrate this approach, we CoG is a fairer comparison than wHat Is done Currently?
examine a modular approach initiated capital cost because it accounts for all Biopharm Services has conducted
at BioPharm Software Solutions (a differences in facility throughput, cost modeling work for more than
business unit of Biopharm Services material costs, labor costs, and so a decade and has developed
Ltd.). The cost model is configured as forth. The indirect (fixed) cost hundreds of cost models with
modules (e.g., capital, materials, consists of the capital charges, manufacturers, technology
consumables, labor) that show the insurance and taxes, and the direct developers, and suppliers. Taking
relationships among the various cost (variable) costs include consumables, into account the manner
categories and the cost components materials, and labor. Table 2 shows in which biopharmaceutical
that constitute the overall CoG the component items that contribute companies’ internal cost evaluations
(Figure 1). This methodology has the each cost category (e.g., the have been developed to date, we
advantage of being scalable, flexible, consumables class includes column can make the following general
user-friendly, and transparent. gels, filters, and single-use bags). observations:
12 BioProcess International June 2010

3. a PersPeCtIve on Cost ModelInG
To get an external perspective, we talked to Richard in addition to market potential, they are looking at cost of
Francis, who until recently headed the process manufacture and supply-chain risk when licensing in as a
development function at BTG. Richard has worked in part of the due diligence exercise.
senior positions in process development for companies “Today the goal has to be to develop cost-effective
such as Centocor, GSK, and Celltech. He provides a broad processes. So as part of the process development activities,
industrial perspective, having been involved in taking it is key to evaluate alternative technologies very early on,
eight biopharmaceutial products to market and in the evaluating options such as expression systems and
development of others that didn’t make it. He now heads
product capture methods (chromatography or
up his own company, Francis Biopharma.
precipitation). These choices are unavailable later on. In an
“In my experience, different companies’ attitudes to cost ideal process development world, suitable small-scale
modeling vary considerably for not looking at production process models would be developed initially to feed data
costs until after product approval. This late evaluation of into process modeling software to map out the process
cost has led to issues where, in one extreme case, a and scale up the operation in silico to evaluate costs and fit
company’s production costs exceeded the sales price. It’s with existing manufacturing platforms (if applicable). This
a mixed picture at the moment, but there is an increasing approach then yields a rationale for selection of a
awareness of costs in the industry. I believe it’s important particular technology or processing platform, which is
that manufacturing cost be evaluated and considered invaluable historical data when trying to justify the
from the initial process conception stages onward and
selection to regulatory agencies or during a due diligence
given an equal weighting alongside product quality and
effort if the product or process is being offered for sale.
safety. Development of a cost-effective process that
consistently yields a safe product meeting predetermined “This way, you are developing business cases to support
quality standards is the goal. From a process new investments, effectively presenting the data set in a
development perspective, a detailed understanding of language senior management can appreciate and
cost in association with potential process risk factors is a emphasize with (e.g., CoG will be, capital expenditure
must-have map to help guide later stages of could be, and the risk factors and benefits are so much
development. This is as important for the small- to easier when all possibilities are modeled out), and the
medium-size companies that are planning to or rationale for selecting a defined set of process conditions
considering licensing out their products. The companies and equipment is explained and justified both
doing in-licensing are more sophisticated these days, and scientifically and financially.”
• There is no consistent definition wHat Is requIred? biopharmaceuticals. To be useful, a
of what constitutes CoG in terms of Clearly, understanding the cost of CoG model package must be
methodology and boundaries (what’s manufacturing drug substance and deployable across an organization and
included and what’s not). Indeed, those factors that influence meet the requirements of different
many organizations will have various manufacturing costs during users. Therefore, the boundaries can be
groups working independently on development of a drug candidate is defined, consistent methods can be
CoG models using completely important to the future of the industry implemented, and common standard
different and incompatible if it is to remain both profitable and cost data can be used. If organizations
methodologies. successful. To date, the development can achieve that, then they will
• The source of cost data is not and use of cost models within
maximize their opportunities to drive
often shared among all users. organizations has largely been carried
out costs early in development with
• Finance departments are not out by individual champions in various
little effort, thus leveraging their
parts of an organization rather than as
always involved, and as a consequence limited resources.
an integral part of product strategy.
they are unable to buy into the
This has led to problems in making
outcome. referenCe
meaningful comparisons within
• Models are often custom built, 1 Sinclair A, Monge M. Delivering
organizations, obtaining group support
not properly validated, and properly for using process CoG models, and Affordable Biologics from Gene to Vial.
understood only by their developers. getting the necessary buy-in to BioProcess Intl. 8(3) 2010: 16-19. •
This can cause problems when it establish a consensus for decision
comes to supporting the models if, for making. This has limited the use of
example, their original developer Corresponding author Andrew SInclair is
process modeling in decision making, the founder and president of Biopharm
changes roles or leaves. These internal evaluation, and directing development. Services Ltd., Lancer House, East Street,
custom models often take months or To some extent these problems have Chesham HPS 1RD, United Kingdom;
years to develop. arisen because, until recently, there 44-14947-932-43, asinclair@
• The models are often inflexible have been no CoG analysis products biopharmservices.com. Miriam Monge is
and geared to looking at a specific set available to companies from third- vice president of marketing and disposables
of scenarios, making them difficult to party vendors that are both simple to implementation at Biopharm Services Ltd.;
reconfigure. use and geared to the requirements of m.monge@biopharmservices.com.
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